9) Given the following information, what is the required cash outflow associated
ID: 2756613 • Letter: 9
Question
9) Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the cash outflow at t = 0?
Purchase price of new machine
$8,000
Installation charge
2,000
Market value of old machine
2,000
Book value of old machine
1,000
Inventory decrease if new machine
is installed
1,000
Accounts payable increase if new
machine is installed
500
Tax rate
35%
Cost of capital
15%
Purchase price of new machine
$8,000
Installation charge
2,000
Market value of old machine
2,000
Book value of old machine
1,000
Inventory decrease if new machine
is installed
1,000
Accounts payable increase if new
machine is installed
500
Tax rate
35%
Cost of capital
15%
Explanation / Answer
MARKET VALUE OF OLD MACHINERY = 2000
(-) BOOK VALUE OF OLD MACHINERY = (1000)
PROFIT = 1000
CALCULATION OF CASH OUTFLOW AT t=0
PURCHASE COST = $8000
+ INSTALLATION CHARGE = $2000
(-) SALE OF OLD MACINERY = ($2000)
+ TAX EXPENSE ON PROFIT OF OLD MACINERY = $350 (1000*35%)
(-) DECREASE IN INVENTORY = ($1000)
(-) INCREASE IN ACCOUNTS PAYABLE = ($500)
TOTAL CASH OUTFLOW = $ 6850
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